#3: Cryptocurrency as an investment
#3: Cryptocurrency as an investment
Whether to invest, and how to invest?
Bitcoin. Cryptocurrency. Are they the same? They are the same for many. Only a few know that there are over thousands of cryptocurrencies out there, and bitcoin is only one of them. Some of the other popular ones are Ethereum, Ripple, Binance Coin, Cardano, and Dogecoin.
Are they secure? Going technologically, they are meant to be secure. The technology on which cryptocurrencies are run is built such that it is run by the people who use them. There is no central authority.
While that may seem like it makes the system more susceptible to fraud, the fact is that if only more than 50% of users are working fraudulently can a system be compromised. That means that if a crypto has a large number of users spread all across the world, the chances of a compromise are low or even nil as in the case of bitcoin (the largest traded crypto).
Yet, that’s only theory. In practice, not many people have the required knowledge to actually audit the tech-end of a cryptocurrency and determine whether it is really secure. With a new currency coming up every day, it’s a hard fact to determine.
Recently hackers stole $600 million worth of crypto from Poly Network. A number of cryptocurrencies were found out to be scams themselves, and so did many exchanges. Such instances make retail investors think twice.
However, if we only consider ‘secure’ cryptocurrencies (assuming they can be identified from the lot) and finally decide whether to invest in them, lured by the historical profits that bitcoins have offered, there are a few facts that must form part of your analysis:
Ten years ago, no government or central bank was even remotely considerate of what was happening in the crypto world. They found it just another fad, that would subsequently die down.
But the situation is entirely different today. Nations are choosing either way regarding ‘cryptocurrency regulation’, and there are high chances that many countries may announce them ‘illegal’ soon.
If any such thing happens, the entire investment can be wiped out within a matter of hours.
Further, the situation is made even worse by the fact that many central banks are planning their own CBDCs (Central Bank Digital Currencies) that may wipe out the need for decentralized currencies like Bitcoin altogether (even for whatever little purposes it is finding actual use today).
The basic premise given by Bitcoin supporters is that there is only a limited number of Bitcoins that can be mined (or generated), hence it is anti-inflationary as against the present-day banking system where the governments and central banks can print as much money they decide.
The supporters also claim that due to this very reason, the financial system as it stands today is on the verge of collapse. When it happens, cryptocurrency will rule the world.
While this theory may seem logical at first read, there is a huge problem. While there is a limit to the number of Bitcoins that can be mined, there is no limit to the number of cryptocurrencies that can exist. Even as we speak, there are more than 10,000 different cryptocurrencies out there being traded every day.
Even if there were to come a day where the entire money system collapses, there will be millions of cryptocurrencies and the logic of ‘limited supply’ will fall flat on its face.
Valuation is another major problem with cryptocurrencies. Every other investment can be valued on the basis of some underlying (stocks on the basis of company results, derivatives on the basis of their underlying asset, real estate on the basis of rental yields), however, the price discovery in crypto trade has been notoriously based on the frenzy at any given point or celebrity tweets 🙄.
Cryptocurrencies, by their very model, are meant to be decentralized. In fact, that is the whole idea behind having these currencies. Yet, in practice, hoarding and subsequent price control have been a major problem with all major cryptos.
You may be understanding now why cryptos are essentially a gamble more than an investment. And they deserve to be treated like one. At least at this stage, until their legality and use are truly known. Even those who classify them as ‘investments’ place them under the ‘most/highest risk’ category.
To us, it seems to be a bubble in the making. Tread cautiously. Even if you have to invest, put in money that you can afford to lose. And there is no money that anyone can afford to lose. Still, if you wish to invest, go ahead and read this tweet, it suggests a way:
That’s all for today.
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Surbhi Singhal is a Chartered Accountant and a Company Secretary; and the founder of Advance Thinktank. The company specializes in preparing custom research reports regarding investment opportunities in India, tailored to the client's needs.